How digital cinema is unscrambled

It has turned the whole logic of digital cinema in India upside down. Scrabble Entertainment, a start-up funded by Manmohan Shetty, is digitising theatres (largely multiplexes) across metros and big cities in India. Old and new multiplexes from PVR or Inox, among half a dozen chains, are quickly signing on.

In just over a year, Scrabble has digitised 100 screens across 23 theatres with equipment approved by the Hollywood-endorsed DCI (digital cinema initiative) standards. That means a Scrabble theatre can play any Hollywood release in digital form. By December 2009, CEO Ranjit Thakur expects to wrap up 200 screens across 50 theatres in large Indian cities.

You could argue that in a market dominated almost completely by domestic cinema, why bother with DCI standards. They are meant for markets where Hollywood is big business. That is precisely why it is surprising that Scrabble is managing to get theatres or that it expects to break even in three years.

Why digital?

The whole point about digital cinema so far, has been digitising single (usually not very profitable) screens in small-town India and bringing them back into the market. That is because digital prints usually involve a one-time conversion cost of Rs 1,75,000-Rs 200,000 while each regular 35 mm print costs Rs 50,000-60,000.

A film usually releases with anywhere between 600-1,500 prints. The bigger the print runs the better the chances of making money in the first week.

However, since costs limited the number of 35 mm prints they would slowly wind their way into small-town markets, by which time piracy killed all potential.

E-cinema solved that problem by making same day release possible in large parts of India. It is now normal for large films to release with 1,600-2,000 prints, almost half of them digital.

The first rollout, almost five years earlier, happened when Shetty's Adlabs (now part of Reliance) tied up with Mukta Arts to form Mukta-Adlabs. Though the Mukta-Adlabs roll-out fizzled out after a few years, it showed the promise of digital cinema.

Later others such as UFO Moviez or Real Images used different business models to great effect. UFO for instance charges a per play fee. Their efforts have meant 2,000 digital screens in India. In a 9,000 (active)-screen fragmented Indian market, these are helping to get in a nice slice of revenues back into the industry kitty.

However, most multiplexes and metro theatres never saw the point of digitising. One, because unlike small-town theatres they have top-of-line equipment which is better than e-cinema, so there is no significant change in picture quality. Even if they wanted to the costs were prohibitive -- Rs 40 lakh (Rs 4 million) for DCI approved equipment against Rs 10 lakh (Rs 1 million) for e-cinema.

Why Scrabble?

Thakur, a consumer electronics man  was, however, clear that he wanted to get into the business of digitising theatres in large cities. "Eighty per cent of the box-office revenues come from 1,000 big city screens. That is my market." In 2007 he approached Shetty with the idea. The latter's firm, Walkwater Media, is now the majority owner of Scrabble.

Scrabble offers the equipment at a subsidised cost (Rs 30 lakh or Rs 3 million instead Rs 40 lakh or Rs 4 million) payable over several years. The reason multiplexes signed on is because they can push the not-so-old equipment into the smaller town properties.

Then they can digitise using top-of-the-line equipment from Christie's and Doremi at a bargain price. Also, as Hollywood goes completely digital it will become difficult to access foreign films for critical metro markets. So, Scrabble's timing is good.

The theatre chain has to take digital prints of any film played on Scrabble's equipment only from Scrabble. On the content side, it has a deal with all major producers and the Hollywood studios that wherever there is Scrabble equipment, the company gets the digital print.

The company makes its money from the prints. After the conversion and digitisation is done by labs such as Prasad or Adlabs, Scrabble transports the print.

For being a secure 'FedEx' kind of service, as Thakur puts it, Scrabble gets a virtual print fee of Rs 20,000 per theatre, irrespective of the screens it has.

This is because the print can be played only on Scrabble's equipment and only for the shows and screens it is authorised for. Thakur reckons that piracy is almost impossible on this system.

Its subsidy of 10 lakh per theatre notwithstanding, Scrabble expects break even in three years, assuming it has digitised 150-200 theatres. That is when it is hoping advertising, too, will kick in as a revenue stream.

The chinks in the Scrabble armour? Well, technology could change and there could be better projectors than the 2K machines that Scrabble is rolling out. That is an evolutionary risk.

The bigger risk is what happens after the difference between digital and non-digital screens disappears, when everything is digitised. Then, Scrabble will need to have really iron-clad contracts with content producers to continue being the 'FedEx' for DCI approved prints or it will have deal with lower revenue per print. 

Till then, it is headed for a good time.